Cencora, Inc. (COR) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. Welcome to the AmerisourceBergen session. I am Bob Jones. I cover the health care services space here at Goldman. Very excited to have AmerisourceBergen with us today. I'm joined from the company by Steve Collis, Chairman, President and CEO; and Jim Cleary, EVP and CFO; and we also have Bennett Murphy, who heads up Investor Relations. So thank you to the 3 of you for participating this year.

Thank you, Bob.

So Steve, I thought we would just jump right in. A lot of topics out there, obviously, given the current situation and how fluid things are. I thought maybe start with -- drug volumes has been a big focus area for us and for investors. And some of the data, I think, we've been tracking around the broader market had kind of showed scripts trending down in the high single-digit range year-over-year in the recent week. There's been some modest improvement, I think, directionally, particularly in the most recent weeks. But just wanted to check back in since the quarter, is that kind of foot with Amerisource's view of the world as far as drug volumes? And anything that would make you more or less concerned relative to the last update we got?

Bob, first of all, thanks. We wish we could do this in person. We always enjoy seeing you at beautiful California resort. But happy to be able to have this opportunity. And just highlight you talk about script trends, but the AmerisourceBergen's resilience and ability to maintain our customers, to maintain patients' access to medications and really just maintain a lot of our financial capabilities throughout this very unique period here in our history. But when you look at script trends, definitely, the trends that we thought would be in place when we had our earnings call in early May are very much continuing. Things are normalizing. We've always talked about the difference between chronic and acute scripts. The chronic scripts were very resilient as well. They carried on. Acute diagnosis have been delayed. And we had some other trends, which resulted in our very strong sales in March, where we had some pull forward sales for 90-day scripts. And I think also, as a lot of customers wanted to have their shelves stocked, there was increased utilization of mail order, which we talked about. And then some of that has all been normalized. And we're starting to see our returns to physician office visits, and we're starting to see the normalizing trends that we had anticipated. Still not quite where we would have liked to be if there was no COVID but overall, encouraging. As you know, the script trends are encouraging.

No, that's helpful, Steve. I guess maybe just digging into that a little bit more. Anything worth calling out as far as the way the different channels, if you will, have trended? If you think about retail pharmacy versus hospital versus specialty? And anything, any nuances that you'd call out as things have started to normalize?

I'll let Jim take this question, Bob.

Yes. Sure. Thank you, Steve, and thank you very much, Bob, for having us today. It's good to talk to you, and I look forward to meeting with you some time, hopefully soon. So and as we kind of dig into the details and as we said on our earnings call, we believe that the largest impact on our business will be in the June quarter as people, including doctors and patients, get more used to operating in a distancing world and begin to seek the care that they need. And as we look across our company, all our businesses are impacted by COVID-19 in some way or another. And so what we did when we look at the balance of the year for guidance purposes, as we analyzed all the potential impacts of COVID-19 and probability weighted those impacts to come up with our guidance. And as we look by channel, it likely varies by the location as restrictions ease state by state. For the specialty physician market, we expect that patients will be able to start to see their doctors, read diagnoses and referrals that have been delayed as office visits and necessary testing were previously limited. And as I said, as we all become more used to the current environment, we'll likely see increased office operability and physician patient interaction. And then also, as I indicated during the earnings call, we are expecting all of our businesses to be rebounding during the September quarter.

Got it. No, that's helpful. And I guess maybe part of the thought process, I'm sure, factored into guidance and the outlook, is around drug pricing. So not on the volume side but maybe on the pricing side. And maybe just to focus in on generics. It seems like there's been some slight improvement, at least in the data that we've been tracking, relative to more modest deflation than maybe what we were seeing several months ago last year. I was wondering if that kind of tied to what you've been seeing? And is there any context you could give us on how meaningful moderation in generic pricing could be on the company's results?

Yes. And so again, as we said on our earnings call, you're right, we have seen some moderation in generic deflation in the past several months. And early on in our fiscal year, we have been optimistic that the moderation would hold, and it has benefited us. We had been hopeful for a few years that the manufacturer commentary about rationalizing their portfolios would result in less downward pressure, and we're glad to see some less pressure in the recent time period. And we also think that it helps in the current environment that there's really been an increased focus on access and sustainability of supply.

Got it. Yes. No, so that was kind of the next question, Jim, I was going to ask, was just around supply. It sounds like from early May to now, it doesn't sound like you'd flag any increase in shortages within the generic world. And I guess, maybe just related to that, there's been some talk about -- because of the fear that there could be disruption, although, again, it doesn't seem like we've seen it, that there could be some domestification of some components of the supply chain and in generics, in particular, just given the relevance of their volume. Any thoughts or comments there on what you've been seeing across the supply chain and how that might change in the future as a result of COVID?

Yes. Let me kind of take the part of that, and then I'm sure Steve would want to answer the second part regarding domestication. But with regard to supply, as you said, we've been in good shape. There's nothing that we would call out. And we've been working hard to ensure that we have strong manufacturer partners and understand their stability of API supply, particularly as it relates to China. And so we have been overall in good shape. And I'll turn it over to Steve for the second part of that question.

Yes. Yes, Bob, so definitely, we've seen some rumblings. And I think that it's important to differentiate between a stockpile and what's important to have in stockpile. And probably the lesson we learned here how was somewhat on the PPE side, which is not what AmerisourceBergen is involved in but also like on intubation products and maybe some anti-inflammatories, potentially antibiotics, some types of antibiotics. But it's an incredibly complex supply chain. And I think any changes would take us many, many years to really bring to onshore some generic manufacturing. Now it's possible that it could be considered. There was, as you know, some alarms, particularly when India put 180 products on curtailment that they couldn't be exported, and then other countries started doing that. And look, the reality is that every country is going to do what it can to keep their citizens safe in the midst of a crisis like this. So I think we will work with regulators and administration and CMS, et cetera, and the FDA to make sure that whatever their requirements are that we are a part of the solution. And I think we have earned a very good reputation by the work we've done throughout this pandemic. And so we look forward to being a part of the discussion going forward. But again, it's not -- these are not short-term fixes, if we were going to be onboarding manufacturing or switching requirement that is 40% of API for Medicare and Medicaid patients needs to be manufactured in the U.S. Those are regulations that if they were to come to pass or take a long time to implement.

Got it. Got it. Yes. I guess maybe just one more on the pricing side. And it seemed less relevant the last couple of years, but on the branded side, any change in thoughts on inflation here longer term? Is there any view or conversations you've had on the branded manufacturer side as far as maybe post the election, could there be more of an opportunity to see price here, for them to take price? And then I know it's become less and less relevant for the industry, but how important, I guess, is that, or if that played out, would that be for Amerisource?

Well, as you said, it has become less relevant. So 95% of our branded contracts are under people service. And so our goal is to make that literally 100%, and we're working towards that. Generally speaking, I think some of the more controversial practices are not being deployed anymore with very high increases. And I think, again, we've really tried to understand the gross versus net, which has really impacted sort of data that's out there. So overall, we think if you -- specifically, if you look at that net pricing, not much has changed. So benefit designs have changed, and it's our view that there's a disproportional burden on pharmaceutical utilizers versus other forms of medical treatment. So we think that drugs or pharmaceuticals are the most efficient source of care. And it's misunderstood generally by people who are not in the know as to what a low percentage of overall health care spend rates actually are. People assume it's 30%, 40%, 50%, I heard. But it really is, as you know, somewhere around 13%, 14% type here. And the industry has really a once-in-a-generation opportunity to really become the knight in shining armor here. So we really hope that, that does occur. I've been on a lot of calls, and some manufacturers are getting very, very bullish on vaccine. I think that would be tremendously exciting if we could get a vaccine to -- best case to all the 7 billion people in the world in the next year or so. Wouldn't that be just remarkable? Next year to 18 months, that would just be remarkable, and I think it would be the really defining moment for our generation if that can occur.

Yes. No, I totally agree. I guess just 1 last one as I think about some of the impacts from the COVID situation. Clearly, a lot of smaller businesses have been hurt across industries as a result of the shelter-at-home restrictions. One pocket that obviously is important in your customer mix is independents. And so I'm just curious what the latest thoughts were around the health of the independents. Have you had conversations with them? Have you seen them struggle anymore from a solvency standpoint? Just -- yes, again, just wanted to get the latest on that cohort.

Yes. Look, although I think like with a lot of other business relationships, we've had to move relationships with the independent pharmacies and the buying groups to virtual meetings, but we are getting -- I hope, that Jim and I are able to convey our messages. And the same way we've been able to really be very active with our independent pharmacies. And again, like with all script trends, we're encouraged by what we're seeing, what we anticipated seeing when we gave our earnings release and what you're seeing in the script trends that you talked about earlier. And certainly, independents play a key role. I think a lot of patients are looking forward to going back to the independent pharmacy in person. I know my pharmacy has been able to utilize deliveries at the front of the store, or you call them and they have your prescription ready for you, my Good Neighbor Pharmacy. I think those are the sort of enduring relationships. Again, some of our independents have been doing deliveries. And what I am absolutely convinced of is that the relationships with the AmerisourceBergen of our customers are tighter than ever because we've been through this together. So we've talked about that we've helped on the business coaching side with CARES Act applications. And we were able to really quickly, at scale, teach our pharmacies how to do that. We also have had a lot of very pivotal webinars for our customers and suppliers and talk about some of the trends that we're seeing. And so I think the relationship that we have is stronger than ever. And definitely, the financing function that the wholesalers provide, the third-party network administration, all of these are really critical for independents to be able to prosper and survive.

Yes. And Steve, one of the things you mentioned in that was just some of the things people have had to do in this environment. One is more home delivery, mail order delivery. We've gotten questions on this as well. I mean have you seen a significant shift in mail or 90-day? And how impactful could that be to the overall financials of Amerisource?

No. Again, we don't get paid per script, as you know. So we get paid per volume. So I think that the trend is not surprising. I think -- I would imagine that while there will be increased digitization, that independent pharmacies will revert very close to how business was before. We've encouraged our pharmacists in the Good Neighbor Pharmacy to be able to dispense 90-day scripts. And we think -- and again, we are a large provider to customers like Express Scripts. So we think that there will be no really sustained damage to independents from the stream. Jim, do you have any comments on that?

Yes. A couple, Steve. And Bob, as you know, mail order customers, they are typically larger volumes, lower gross margin but very efficient for us and that we're shipping pallets and so very efficient from an operating expense standpoint. So it is profitable business for us. And then overall, to emphasize Steve's comments, independent pharmacists, they're resilient, they're entrepreneurial, they're highly customer service-oriented. And so just like they have for many, many years, we expect them to continue to perform well as a customer group. And it's just one of many examples that in this tougher COVID-19 environment, we are providing extra service to our customers and really kind of proving our value across all of our customer groups, including independent pharmacies.

Got it. Yes. I guess maybe just to shift a little bit over to specialty. This clearly is an area that's been, for you and your peers, talked about as a pretty meaningful growth driver. And probably even more so given your outsized exposure at Amerisource. Specialty is a bit of a catch-all phrase, and you clearly have a lot of breadth within specialty. So maybe if you could, just share with us where you're most excited within the specialty offering as it relates to that future growth.

Yes. So Bob, it's really remarkable. Even throughout this, our specialty business have been fairly resilient. Of course, you know our specialty business -- for those who are not as familiar with it, our specialty franchise includes specialty distribution, which includes our specialty physician services. And then outside of distribution, our global commercialization services for manufacturers. Many people say, the Amerisource business is doing well, even though you do all those things. So let me just differentiate what they are. So especially distribution, our biggest business there by far is our distribution of oncology and physician-administered products in therapeutic areas like urology, rheumatology, ophthalmology and urology. So those are done through 2 companies, Oncology Supply and Besse Medical, which actually we acquired in the '90s when I was with the former Bergen Brunswick. We also have practice management services, which have been very key to practices as we've done wraparound services that help physician services essentially run their practices more efficiently, including the group purchasing organization function, inventory, data and analytics, and financial services. So we have, like, for example, a product called [ Infodar, ] that helped our doctors understand what was going on with their patients and what was going with their trends and what sort of patients that we're not seeing versus what they were prior to the crisis. So it was very, I think, helpful to have those sort of data services available through our Oncology Supply and Besse. Our global commercialization services businesses are really innovative services that support approval, access, economics, coverage, payment and patient support required for commercialization of complex specialty products. So financials for our special distribution and physician services are reported within the pharmaceutical distribution services, while the performance of our global commercialization services, along with MWIs, report in other. And as you know, specialty has really become the brand business with over 90% of prescriptions now being off-label. So most of the newer therapeutics that we improved are really characterized as specialty drugs and have really become the current standards of care in many different treatments. We continue to benefit from the innovation, and there will be some launches this year despite COVID. And one of the trends you asked about that we're tremendously excited about is the continued increased acceptance of biosimilars, which we feel is a trend that will allow headroom from new innovative drugs to come to market as some of the older therapies really have biosimilars and the ASPs will be reducing over time. It's also important, we like to point out, that not only are distribution businesses fueled by biosimilars, but also businesses like Lash that help with reimbursement and access and inherent services really can benefit from biosimilar introduction.

No, that's all helpful. And clearly, a lot going on within specialty. I guess maybe one angle, and Steve, you mentioned it as one of the larger pieces of specialty is the actual physical distribution of physician-administered drugs, oncology and the other ologies. The work we've done would suggest that 2020 was set up to be a record year for new biologic launches, and actually 2021 could be -- pre-COVID, it was looking like it could be even bigger. So I guess 2-part question. Have you seen delays in anticipated new biotech launches this year? And then are we thinking about it right that if we do enter into a period, even if it is pushed out a little, of really record new launches that this could be a meaningful tailwind to the business?

Yes. I mean generally, though, the real impact will come as the products mature. And sometimes it's competition, if not really patent exploration, but even just therapeutic equivalent or -- in the range of therapeutic equivalent products. And that's really when the AmerisourceBergen specialty services can really help differentiate products. But in general, as you pointed out, Bob, we are expecting a robust number of biologicals to be launched this year, and innovation and investment continues to be strong. We've continued to see some launches during this period but none that are really worth calling out as the same individual basis. So definitely, if anything -- if anything really, really becomes impactful. But we just continue to see specialty as such a massive driver for our -- the benefit of patients and for the benefit of our core business services that we do that. And it is fueled by the innovation and improvements in data and trial preparation and everything that manufacturers are working so effectively towards.

And then, Steve, you mentioned biosimilars. I feel like for those who've followed the industry, this has been kind of a theoretical topic for a very long time. And it does seem like there's been a subtle shift in tone in the industry and from you as far as this becoming more of a reality. Could you maybe just elaborate a little bit on just how meaningful you think a more mature or established biosimilar market could mean for the industry and could mean for Amerisource?

Yes. So it is a significant opportunity. I mean it's probably about 9 months ago that there was a editorial published in The Wall Street Journal saying time to throw in the towel in biosimilars. And I think that we actually -- unusually wrote a response that was published just saying that we really do believe that biosimilars will take effect. And literally -- I mean I don't want to say that we will profit from that, but they really have started to take hold, and they are a significant opportunity. And we've seen very significant market share for some of the therapies that have been around for a while. And for ABC, it becomes particularly significant when there's 2 biosimilar or 3 biosimilar products. And we are seeing that with some established oncology supportive care products, for example. So I think it's also an important trend is the health care systems inevitably look for savings. So as we move towards cell and gene therapies, personalized medicine, it's important that we create a room for the expense that those -- there is going to be a cost burden. Some of those therapies are very expensive to do the trials, very expensive to launch, do the R&D. So there will be fairly expensive products, and we need to create a headroom to bring them into the market. And I think we'll maybe talk about interchangeability at some stage. But oncology is not as important, but certainly on the Part D drugs, it is. And I think we'll continue to see the legal barriers go by the wayside. It's important that there's clarity to manufacturers because it is an investment to bring a biosimilar product to market. There is a lot of work there. So it's not like getting a generic product improved, as you know.

No, no. I think that makes a lot of sense. I want to make sure we touch on some of the other components outside of core pharma and specialty. Maybe Jim, switching over to MWI, I think the vet end markets, probably a little harder to get real-time visibility into. So just wanted to check-in. Any updates on kind of what you're seeing in volumes? Have they -- across MWI's end markets, have they started to pick up more in areas of the country where businesses are reopening?

Yes Bob, first, let me start by saying that MWI, we feel it's really well positioned in its market, very strong customer relationships, particularly with key customers in both companion animal and production animal markets. And now let me kind of take a step back and talk about the markets. And we expect the companion animal market to rebound before the production animal market. Of course, as most people on the call are probably being pet owners, know people take extremely good care of their pets. And so we expect that market to be rebounding similar to physician markets as people get more comfortable and the distancing -- social distancing environment and go into their practitioners. And in fact, there are a couple of industry sources of data that's publicly available, information that shows some good rebounding already in companion animal practices. And so we expect that to come back sooner than production animal. With regard to production animal also have seen some recent industry data that packing plants are now at higher levels of capacity utilization than they were just a few weeks ago. And so that's good news for the production animal market. But for that market to fully come back, it will require a rebound in demand from restaurants and other institutions like schools and hotels. And so that market also will come back, and we're confident will be a strong market for the long term, but will come back a little bit slower than the companion animal market. And MWI has weathered crises in the past just like all of AmerisourceBergen has, and we feel very confident with the resilience of the business. And again, a very strong business with regard to our market position and size, our really strong customer relationships and corporate account relationships. And just like other businesses at AmerisourceBergen, this is the time where we're really supporting our customers and selling value for our customers.

Yes. No, that makes a lot of sense. I guess maybe just the other piece of the business that we didn't touch on was global commercialization. I think a lot of us think of World Courier when we think of that business. But I guess similar question how have things progressed there? Kind of what's the expectation broadly as clinical trial work starts to ramp back up?

Yes. And so World Courier is again, just like so many businesses, proving its value to customers. World Courier really shines in times of complexity when it can solve customer problems, and World Courier is solving customer problems now. And so we've seen things at World Courier. And we talked about this on the earnings call that things like number of shipments can be down, but the size of shipments can be up. And of course, there are challenges in things like restrictions on movements between countries, but again, World Courier is really able to shine and solve those types of problems for our customers. Another area where we have capability of World Courier, which, of course, has really grown, as one would expect, is direct-to-patient services. And so whether it be bringing medications directly into patients' homes for at-home clinical trials or commercial distribution, that's another growth area of World Courier where we're solving problems for our manufacturer customers. So we feel very, very good about the role that World Courier is playing now.

Interesting. That's helpful. I guess another big topic that I'd be remiss not to touch on at least is the opioid potential settlement. A number of these trials, as I'm sure you're aware, have been pushed out in the current environment. I was just curious if you'd give us an update on where things stand today. Are there goalposts or milestones we should be thinking about as far as next trials or next important catalysts? And just any thoughts around timing of the potential global settlement, I think, would be of interest for us and investors.

Well, Bob, it's my sincere hope that I think the COVID crisis and our industry's response to the pandemic highlights the essential role that we have in the supply chain, which often goes unnoticed by those us who are not close to the industry. We've remained focused on the country's critical needs at this time, and like a lot of other companies have really focused our energy there. And now we're starting to talk about resumption of more normal activities and getting used to working in this environment. But essentially, the opioid litigation and related matters are ongoing. And given the complexity of the issues, the number of parties involved, we continue to prepare for the trials, though inevitably, the timing of the trials will be impacted. So the New York trial was scheduled to begin in March, and it's been pushed out. We don't have a definitive date yet, but we will continue to state what we have for at least a year now that we continue to hope that the national parties will see the merits of a potential global framework, and particularly in these challenging times, will recognize that, that could be a benefit to those in need.

Got it. I guess, Steve, maybe just another big topic, and I think how the elections, both at the presidential level and within Congress play out, will matter a lot here. But just curious if there's any thoughts around potential legislative or maybe even more relevant potential regulatory changes that are on your radar that should be on investors' radar? I know that there was some talk about CMS proposing the Part D plans being allowed to implement a second specialty tier for the placement of preferred specialty drugs. That's just one example. But are there things like that or other things coming out of D.C. that should be on our radar?

Yes. Look, I think, Bob, we are active in policy matters and particularly in areas that affect us, like pedigree and the reimbursement of our customers, access for pharmacies, fees for pharmacies. Those are the sort of things that we get involved in, and they would also include fees for physicians with Part B. So we always would be on the side of access. We think that this current crisis has again underscored how important it is for patients to have choices. You could see -- my understanding is that in Europe, where a lot of the specialty drugs are administered in hospitals, there's a move afoot to do more work in the homes and even in physicians' offices are really to vary the way that patients access medication. So I think what we've said is that we are really -- we think that the pharmaceutical industry is an important driver of value for the whole health care system and that we should continue to believe that the U.S. should be the center of innovation for the world, and that means that we need a stable pricing environment. So that's where we would come down on these issues. So nothing that is very clear or that is imminently concerning to us. Jim, do you have anything you'd add?

Steve, the only thing that I would emphasize is, I think, over the last few months, our industry has certainly shown our value and certainly shown, the importance of maintaining the integrity of the supply chain. And so I think whether it be customers that we talked about today or policymakers in Washington, I think, will recognize our value, our purpose, the critical nature of the service we're providing more than they ever have in the past.

Yes. I think that's fair. I mean I guess just in the few minutes that we have left, I mean, the one last major topic I wanted to touch on was capital deployment. The net debt at AmerisourceBergen has been pretty low for quite some time now, so seemingly, you'd have a good amount of balance sheet flexibility. I know things in this environment, obviously are, I'm sure, pushed out, delayed. But as you kind of look past the crisis, any updated thoughts on capital deployment priorities? Is M&A something that's a little bit more top of mind, just given where you sit from a leverage standpoint? And if so, kind of where are the most interesting opportunities in your mind?

Bob, I'll start out talking a little bit about capital deployment. And of course, you're absolutely right. Our net debt is low, and our free cash flow guidance is strong as it has been in past years also. And our capital deployment priorities remain unchanged. We want to bring value to our shareholders through CapEx, the internal investments in our company, our strategic M&A, opportunistic share repurchases and having a reasonable dividend also. And I think that we've really proven this year the value of our internal investments, whether it be automating our distribution centers or big investments in IT. They've really paid off in our business continuity plans. With regard to opportunistic share repurchases, I think we've done a good job this year. In the month of March alone, we bought back over $215 million of our shares as the market saw some weakness. When it comes to M&A, there's not anything that we're missing, but we continue to evaluate opportunities, pharmaceutical-centric opportunities. We're selective. We're going to be strategic, and they have to be actionable. They have to have appropriate returns. But we'll look at pharmaceutical-centric opportunities that allow us to deepen relationships upstream to manufacturers and also build on the strength of our capabilities, downstream to providers.

That's great. Steve, any final thoughts?

Well, just -- we haven't really seen the sort of value in making acquisitions. But certainly, it's something we stay close to. And we'll see how the environment changes. It's a fluid environment. I think financial markets have surprised a lot of us. But ABC, as you pointed out, Bob, has got a very strong balance sheet. I think we -- with our transformation program, we really are ideally situated from a talent management perspective to manage acquisitions in a way that we have maybe never been in our history where we already are at the most aligned we've ever been. I would say that ABC is really operating at the top of our game. I've been tremendously proud by the way that our people have stepped up in this crisis. And I think we feel very bullish about the long-term prospects for our company, our positioning, our relationship with our key suppliers and customers and the financial strength and the experience of the people we have in the company. So Bob, thank you. It seems we've covered a lot of ground very quickly. We really appreciate the time, and we appreciate everyone's attention on this Tuesday afternoon. Thank you.

Yes. Thank you, Steve. Thank you, Jim. Really, thanks. I appreciate you guys participating. Thanks for everybody who dialed in. Have a good day.

Thank you.

Thank you, Bob.